UBS's commentary on China

UBS's commentary on China

As the situation in China unfolds, our team of economists and strategists will closely follow the implications for markets and economies around the world. Find all the latest commentary from UBS here, updated regularly as the situation plays out. To request a specific report, please contact Huw Williams.

China's trade data surprised to the upside today, especially exports which nearly quadrupled market expectations (16.4%y/y vs. 4% in Jan-Feb) despite a high base. Imports decelerated to 20.3%y/y, modestly higher than consensus and our forecasts of around 15%. We estimate that real exports rebounded just as strongly, to 15.5%y/y – almost 3 times as fast as previously. The moderation in real imports was similar to nominal, to a pace of 14%y/y.

We expect China’s Q1 GDP growth to have stabilized at 6.8%y/y, with slightly softer sequential momentum. March’s data release will likely show China's economy on an even keel, with firm industrial production momentum albeit marginally lower y/y growth on a high base, slower property sales, slight cooler monthly FAI, softer overall credit growth, better exports, and a modest headline FX reserves increase. For inflation front, we expect CPI to have edged up and PPI to have started softening on y/y basis.

Trade and Potential Trade Friction

China's economy has many evolving issues that affect global markets and concern investors. How should one understand these complex issues? In this 5th instalment of our "Understanding China" series, we analyse China's changing trade patterns, potential trade friction with the US and possible implications for various sectors and other economies.

China's interbank liquidity has tightened and money market rates surged since mid-March, with the most watched money market rate DR007 – the 7 day repo between depository institutions using rates bonds as collateral – climbing to 3.1% on March 21, the highest since April 2015. This is 60 bps higher than OMO's 7 day reverse repo- a quasi-policy rate - the largest gap since the PBC suggested DR007 as an important market rate indicator in Q4 last year.

2017 kicks off on a strong note

Jan-Feb industrial production grew by 6.3%y/y as both domestic and external demand rebounded. Infrastructure investment rebounded by over 21%y/y thanks to solid local project implementation and credit support, while strong property sales and transport services helped to push up tertiary value added..

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